In essence the answer is, how long is a piece of string with budgets as low as 10% being mentioned, right through to spending 120% of year one revenue.
Let’s start with 40%
According to SaaScribe marketing budgets will vary greatly, ranging anywhere from 10% to 40% of your forecast annual recurring revenue (ARR).
One method is to use 40% of your revenue-growth delta as a reasonable marketing spend. To put this in context, a company with $1.5 million in ARR that wants to get to $4 million in ARR would be looking at a growth delta of $2.5 million. 40% of this would mean a marketing budget of $1 million.
Or, 82% of year one revenue?
A Pacific Crest Survey consisting of one year of data from SaaS companies finds a leading coefficient of 0.82, meaning that for each dollar spent on marketing and sales generated $0.82 and 2 years on, the increase in revenue growth has more than paid off, with the results showing that for each dollar spent on marketing and sales $2.20 revenue was generated.
- When assessing customer acquisition cost, companies should aim for a 1:1 ratio of dollars/pounds invested in marketing and sales (CAC) for every $1 of recurring revenue generated over the first 12 months of that customer’s lifetime
- Looking at the Pacific Crest Survey results we can see that a large percentage of companies are indeed investing a large amount in marketing and sales, with a median of 28% of their projected growth rate. Those that are investing 35% or more are experiencing not only higher growth rates, but also diminishing returns when investing above this mark
Similar to this study, VC Tom Tunguz has discussed that successful SaaS companies invest between 80 and 120 percent of their revenue in sales and marketing. In the first 3 years, research found that public SaaS companies spend between 80 to 120% of their revenue on sales and marketing (using venture dollars or other forms of capital to finance the business). By year 5, that ratio has fallen to about 50% where it remains for the life of the business.
What about the big software companies?
If we look at bigger companies Steve Jobs understood the vital role marketing plays in a company’s success, which explains why Apple and many of the most successful companies in the world spend more on marketing and sales than they do on research and development.
In 2014, Microsoft, Cisco, Quest Diagnostics, Intel, Salesforce, Constant Contact, LinkedIn, Marketo, Bottomline Technologies, Marin Software, IDEXX Laboratories, Tempur Sealy, Tableau and Twitter among many more all had marketing and sales budgets that were greater than 14% of revenue, some spending as much as 50%! All of these companies also grew year-over-year.
Some SaaS specific examples:
Back to SaaS marketing spend:
- Salesforce invests 53% of its revenue into sales and marketing! Whilst this data is from 2014 that’s still just over half of its $4.1 billion in revenue generated in 2014. What do they get in return for such a hefty investment? They get growth! In 2014 Salesforce grew by 33% over the previous year. What’s more, Salesforce has a 16% market share of the CRM industry, according to Gartner, which is greater than some of the most well known CRM providers—Microsoft, SAP and Oracle. Note Salesforce’s last revenue number from February 2016 was $6.67 billion
- Constant Contact, an email marketing company with 2014 revenue of roughly $331 million invested 38% of their revenue into sales and marketing, which resulted in growth of 16% over the previous year
- Tableau has now become one of the fastest growing companies in the 55-year history of business analytics software. According to the Tableau 2014 annual financial report, investment in marketing is expected to increase in 2015 and the company “expects sales and marketing expenses to be our largest category of operating expenses as we continue to expand our business.”
|Brand||Revenue invested in sales and marketing||Revenue growth|
|Constant Contact||38% $125,810,000||16%|
|Manhattan Associates||11% $52,600,000||19%|
|Marin Software||48% $47,700,000||29%|
One thing is clear here – 10% (or even 40%) isn’t the magic number. At least for these SaaS companies, who are targeting growth and doing so very successfully thanks to their investment in the services they sell.
Why do SaaS companies spend more?
According to Agile Payments SaaS company spends will vary, because the service/business model is different from a normal business model. SaaS companies are always under extreme pressure to grow recurring revenues. The company’s goal is to pay itself back for the cost of acquisition, and before churn catches up.
Its prediction is a safe estimate of marketing and sales spend should be anywhere from 10 – 40 percent of your annual recurring revenue (ARR).
Spend too little, and you will never create the desired growth. Spend too much, and you can quickly burn through capital and leave yourself short of ever seeing a profit.
VC, Jason Lemkin on SaaStr recommends starting by knowing your Predictable Cost of Sales: figure out what % of your Annual Contract Value (ACV) you can really afford to spend on marketing.
Many will talk about a good metric being spend about your first year ACV on Sales + Marketing. Jason talks about growth of one of his SaaS businesses “spending 100% of ACV on Sales and Marketing at first, and then once we hit about $3-$4m in ARR, scaling back to about 80% to make the business Cash Flow Positive. So, for example, once the model worked, we could spend about 35-40% of First Year ACV on “Marketing”.
Second, no matter what the model says … you should spend $1 in marketing to make $1 in ACV wherever and whenever you can. And maybe even a lot more than that.
“Most enterprise customers are going to be worth $6+ for every $1 you spend. The cheaper categories – customers you get from your mini-brand, virally, from word-of-mouth, etc – these customers cost $0 to acquire, plus customers you get from partners and channels. It’s hard for these to scale too big in SaaS, but whatever you get, is still pretty cheap and will help balance things out. The cheap and free leads will balance out the expensive ones, once you have a mini-brand at least.”
Like any business it’s good to have this research as a starting point but your marketing plan and spending should be unique to your company. Whilst 10% minimum, 40% average and 80 – 100% for fast growth are coming out a lot it will depend on factors like:
- How much money you actually have
- What your growth plans are
- Your product
- What marketing team or agency you use
Do you need help with your SaaS marketing?
Whether you need help creating a marketing strategy and budget or have a budget in place Xander Marketing can help. We partner with SaaS businesses globally supporting growth through new customer acquisition, more leads, more website traffic and building brands.